Quantifying the effect of long-term contract offered to pivotal suppliers on mitigating market power
✍ Scribed by Young Woo Nam; Jong-Keun Park; Yong Tae Yoon; Kwang-Jae Song
- Publisher
- John Wiley and Sons
- Year
- 2008
- Tongue
- English
- Weight
- 196 KB
- Volume
- 18
- Category
- Article
- ISSN
- 1430-144X
- DOI
- 10.1002/etep.195
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✦ Synopsis
Abstract
The market power by large suppliers remains to be problematic in establishing an efficient competitive market for electricity. The exercise of market power is often facilitated due to a few notable properties of electricity as a tradable commodity. The pivotal supplier whose capacity exceeds the market's surplus of capacity above inelastic demand can strategically withhold its capacity and cause an undesirable price spike. This paper presents a methodology for determining an adequate amount of mandatory long‐term contract to be used to mitigate the market power of the pivotal supplier and to eliminate the undesirable price spike. Using the Cournot model, the effect of mandatory long‐term contracts is measured with respect to market equilibrium for the pivotal monopoly in which there is only one pivotal supplier and for the pivotal duopoly in which two suppliers join together and become pivotal. Applying the methodology described in the paper, the market efficiency is assured as the pivotal supplier that no longer has the incentive to cause the undesirable price spike. Copyright © 2007 John Wiley & Sons, Ltd.